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Solid Results for America's Largest Shopping Center Landlord

The company's monstrous portfolio of 896 properties across 44 states, Puerto Rico, Canada, Mexico, and South America, has recovered a significant amount of lost occupancy, especially in the big- and mid-box categories.

NEW YORK ( TheStreet) -- As a leading landlord of shopping centers in the U.S., Kimco Realty ( KIM) has emerged from the Great Recession with an enviable tenant list featuring many higher quality and better credit tenants. The company's monstrous portfolio of 896 properties across 44 states, Puerto Rico, Canada, Mexico, and South America, has recovered a significant amount of lost occupancy, especially in the big- and mid-box categories.

Accordingly, Kimco has replaced many of their troubled tenants with higher-quality retailers. This diverse portfolio includes many brand names and the highly diversified platform remains the largest landlord of Costco ( COST), Home Depot ( HD), TJX ( TJX), Target ( TGT), Ross Stores ( ROST), Walgreen ( WAG) and Bed Bath & Beyond ( BBBY), all strong investment grade companies. These tenants have enabled Kimco to draw more shoppers to the properties, improve leasing demand, and position the assets to better withstand another downturn.

Last week, Kimco reported its fourth quarter and year-end 2012 results and the improved performance is indicative of the higher quality income fundamentals. As David Henry, CEO of Kimco, explains:

"Overall, the shopping center industry in our portfolio in particular continues to demonstrate steady and sustained improvement across the board, benefiting from population growth and very little new development. Effective rents and occupancy rates are increasing at an accelerating rate. Our key metrics or vital signs, as we like to say, are very strong with 11 straight quarters of positive same-store NOI growth and an occupancy rate just under 94%, representing our highest level since the start of the recession and very high leasing spreads."

Kimco reported Funds from Operations (as adjusted) at 33 cents per share, up 10% from 30 cents per share last year. The full year 2012 Funds from Operations (as adjusted) came to $1.26 per share, reaching the top end of the guidance range. Kimco's occupancy climbed to 94% (on a gross basis) up 30 basis points sequentially. Kimco, with assets of around $9.74 billion has excellent liquidity of around $1.4 billion.

Kimco affirmed its 2013 FFO guidance range of $1.28 to $1.33 adjusted per share with a midpoint of $1.31. At the midpoint range, the Funds from Operations per share growth is a solid 4%.

A Focus on a Circle of Competence

Kimco has continued to accelerate its shopping center recycling program and the $8.8 billion (market cap) REIT is in the final stage of monetizing its non-retail assets. The largest non-core asset, InTown Suites, is under contract and Kimco expects to monetize "over $200 million during 2013."

As explained by Kimco's CEO, Dave Henry, on the latest earnings call: "Our sales contract with Starwood Capital on the InTown portfolio is now firm with no due diligence contingencies, and the sale is expected to close in the second quarter when the complicated loan assumption process is completed."

Other notable recycling activities for Kimco -- a trend toward reducing the company's circle of competence -- are best explained by Henry during the latest earnings call:

"During 2012, we sold 68 shopping center properties in the U.S., which in general read or not in our key long-term markets, were represented lower quality assets. At the same time, during 2012, we acquired 24 additional shopping centers with generally excellent demographics, strong tenants and long-term growth. We are committed to continuing quarter-by-quarter to upgrade our portfolio, focusing on larger properties within our key markets. The sale of the remaining non-strategic and non-retail investments will provide the capital to acquire additional high-quality retail assets."

Picking Up Some Integrated Assets

Kimco recently announced that it was under an agreement with Blackstone ( BX) and UBS Wealth Management-North America Property Fund to purchase around $1.1 billion in assets: 40 high-quality shopping centers containing approximately 5.6 million square feet. Kimco is already the operating partner in the deal and the company announced that it was increasing its 18% ownership interest to 33%. Nothing like putting more "skin in the game," especially when you know the players already.

In addition, Kimco previously announced that it was acquiring a fractional interest in just under 900 SUPERVALU grocery stores across 5 established grocery brands. The established buying partnership is considered to be a "pure real estate play" for Kimco and the obvious synergies should provide the company with an attractive risk-adjusted role. As Milton Cooper, Kimco's co-founder and co-Chairman explains (on the latest earnings call):

"Our role in the SUPERVALU transaction is as a real estate partner. We have been retained and have a fee arrangement, but our principal job is to help in the monetization of surplus real estate aspects of the transactions that require real estate expertise. And I suspect that out of that activity, there will be opportunities for acquisitions, and it should be accretive."

On the international front, Kimco's Canadian integration has performed exceptionally well driven by high occupancies and growing retailer demand. Kimco plans to open its first Target store (in a JV with RioCan) and this will be the first of 25 Target store openings per quarter in Canada. As Henry explained on the earnings call: "(This) should be transformational in the Canadian retail industry. With nine new scheduled Targets in our Canadian joint ventures, we are confident of both income and occupancy growth."

Kimco is a Buy

Kimco is currently trading at $21.55 per share with a current dividend yield of 3.90%. The company increased its dividend by 5.6% in 2012 and I expect to see further growth in 2013. Based upon my NAV pricing , Kimco appears to be trading at a discount of around 7%.

For those looking for a better margin-of-safety, Kimco has four Preferred issues, two done in 2012 with the lowest coupon ever issued: (1) Preferred Issue K 5.625% Perpetual Preferred and (2) Preferred Issue J 5.5%.

The Kimco fundamentals are becoming more attractive, and let's turn to the company's CEO, David Henry (on the recent earnings call), for the value proposition:

"In the future, we expect to focus our energies on North America and as mentioned before, concentrate on certain key primary core markets which in general are highlighted by strong demographics, limited retail per capita, barriers to entry, larger sized properties and higher population densities. We are determined to achieve over time a consensus among our shareholders and analysts that Kimco truly owns and operates great products."

At the time of publication the author had no position in any of the stocks mentioned.